Monday, January 9, 2012

Wither Canadian and US Pensions?

When Ellen Sargent took a job as a purchaser with the City of Saint John in New Brunswick 26 years ago, she didn’t expect that living below the poverty line when she retired would become a possibility.

Like most municipal employees across Canada, Sargent was promised an indexed pension by the city as part of the terms of her contract — a pension that both she and the city would contribute to over the course of her employment.

But now the 55-year-old widowed retiree is facing the prospect of having to subsist on her $25,000 annual pension without it increasing to meet the rising cost of living.

That’s because the City of Saint John is struggling with a $165 million funding shortfall in its pension plan, and is attempting to make a number of contentious changes, including suspending pension indexing, to close the gap.

“Let’s say you took a job with a starting salary of $50,000 and 20 years later, you were still making that. How would you survive when the cost of everything keeps going up?” Sargent said from her Saint John home. “I might be able to survive on my pension until my 60s, but if I don’t get that little bit of indexing every year, 20 years from now, I’m definitely going to be under the poverty line.”

Sargent contributed 9 per cent of her income every year — which the city was supposed to match — during the course of her career, and said she finds it disheartening that benefits that were promised to employees could now be cancelled.

“When you enter an agreement when you take employment, you don’t expect that agreement to be taken away.”

The pension woes facing Saint John’s retired workers aren’t unique. Both private and government-sponsored pension plans across the country are facing deficits as a result of falling stock market returns, historically low interest rates and changing demographics.

The stock market crash of 2008 drastically reduced the value of the assets in many plans, creating huge deficits that reached into the billions for some — a predicament that will take many years from which to recover. Many pension plans saw losses of up to 20 per cent of the value of their assets between 2008 and 2009.

Shortfalls occur when a company or organization with a defined benefit pension plan does not have enough money to cover the plan’s obligations to retirees. Pension administrators are legally obligated to make up these deficits over time. To assist pension plans after the 2008 crash, most provincial governments extended the five-year period for making up deficits to 10 years.

Ontario’s municipal employee pension plan, OMERS, which serves more than 400,000 members, retirees and survivors, found itself with a funding deficit of $4.5 billion in 2010, up from a shortfall of $1.5 billion the year before. The fund estimates that it won’t return to a surplus position until 2025 — even with temporary contribution increases and benefit reductions.

The Ontario Teachers’ Pension Plan, the largest single-profession pension plan in Canada with assets of more than $107 billion, experienced a funding shortfall of $17.2 billion in 2010. This was attributed to a number of factors, including retirees collecting pensions for more years than they worked, low interest rates and payouts exceeding contributions by nearly $2 billion annually.

To help address the deficits, many plans have increased contribution rates for employees, reduced or eliminated guaranteed indexation of retirement benefits, and even considered raising the retirement age.

In Saint John, city workers have agreed, in principle, to a two-year wage freeze, an increase in the contribution rate, and a temporary suspension of indexing. But because pensions in New Brunswick are governed by provincial law, no reforms can be made without a change to legislation. The city has asked MLAs to convene a special January sitting to address the issue, instead of waiting for the regular spring session to begin in March, but so far no plans have been made to change the schedule.

“We can’t look at the worst case scenario,” said Saint John Mayor Ivan Court. “We’d be losing a lot of jobs and the scenarios are terrible if you consider the cuts in services that would have to take place if the province doesn’t allow us to make these changes.”

Ending cost of living increases for current employees and suspending indexing for retirees would save about $75 million. But if the provincial government doesn’t agree to Saint John’s proposals, the city says it would have to cut services and raise properties taxes by more than $200 per year — and even these measures might not cover the pension shortfall.

Quebec is experiencing similar problems. Over the past year, Montreal Mayor Gérald Tremblay has been publicly ruminating on reforming the city’s 28 pension plans by negotiating with unions, and recently Quebec City Mayor Régis Labeaume called for a provincewide debate on public sector pensions.

The cost of Montreal’s pension funds have risen to $600 million this year, up from $130 million in 2005, while the average city employee will retire with an annual pension of $35,000 at age 55.

“This is a city with major infrastructure problems and instead of investing money into the services taxpayers would like, it’s been forced to divert money into pensions,” said Bill Tufts, a Hamilton benefits consultant and co-author, with Lee Fairbanks, of Pension Ponzi: How Public Sector Unions are Bankrupting Canada’s Health Care, Education and Your Retirement.

“The impact on the public sector pensions and the commitment that taxpayers have to funding them means they can only be funded by raising taxes, taking on debt or cutting services.”

To alleviate pension pressures on municipal budgets, Tufts argues that retirement ages should be raised to 65, the same age that Canada Pension Plan payments kick in, to give workers more time to contribute. He also says defined benefit plans, in which the pensions are set in advance according to a formula and guaranteed, should be converted to defined contribution plans in which only the amount of money workers and companies put into the plan is set.

Finally, employees and their employers should contribute equally, he says. In Montreal, for example, the city covers about 70 per cent of annual contributions, while employees make up the remaining 30 per cent.

“It’s important that pensions are fair for those entitled to them but the also must be fair to the taxpayers who are funding them,” he said.

For their part, unions argue that civil service pensions are, among other things, compensation for the fact that most public service jobs pay less than the private sector. Sargent earned $52,000 in her last year of service, and paid 9 per cent of that into her pension plan.

The irony of the situation is that most Canadians don’t have pensions — only about 6 million workers in this country are members of employer pension plans, according to Statistics Canada. And those with defined contribution plans can expect to work to age 67 to make ends meet during retirement, according to pension consultants Tower Watson.

“We’re in a world of public sector debt,” said Ian Markham, a senior actuary with Towers Watson. “When you add all the debt up, we’ve got a fairly high debt to GDP ratio in Canada. How will that get mitigated? I’m afraid one source might be pensions. I think taxpayers have certainly got the right to question how public sector workers are getting remunerated.”

Pensions by the numbers

1.08: Market value, in trillions of dollars, of Canadian employer-sponsored pension funds in 2011.

6: Number of Canadians, in millions, who are members of employer pension plans.

2,790: The median contribution, in dollars, made by Canadians to their RRSPs in 2010.

58: Typical retirement age of a career teacher in Ontario.

46,000: Annual starting pension, in dollars, of a typical career teacher in Ontario.

Sources: Statistics Canada, OTPP

I've already discussed the great pension divide between the public and private sector in Canada. I do not want to demonize the public sector and I am a staunch supporter of expanded CPP for all Canadians and firmly believe that defined-benefit (DB) plans are much better than defined contribution (DC) plans.

Having said this, we desperately need pension reforms in Canada. So far, the Harper government has been pandering to banksters and insurance hacks, banking on PRPPs. Throwing everyone into pension poverty is not my idea of sound pension reforms. We really need to roll up our sleeves and implement some serious reforms, including governance reforms to salvage our pensions.

I also think it is high time we roll up all these city and municipal pension plans into well governed large defined-benefit plans. The amount of corruption, waste and mismanagement going on in many of the smaller plans is scandalous. That's not to say that our large public DB plans are perfect but at least they are more transparent and more accountable.

Canadian pension plans should fare better in 2012 based on forecasts for the year by Canadian and global money managers, a new survey concludes.

Fifty leading institutional fund managers surveyed by pension consulting firm Mercer predicted growth in Canadian and global stocks will average 7 per cent in 2012, while U.S. stocks are expected to grow by 8 per cent.

The managers also predicted interest rates will rise this year and long-term bond prices will drop, averaging a return of just 0.4 per cent this year.

“Pension plans would hope to see the managers’ predictions come true,” said Mercer retirement professional leader Scott Clausen.

While falling bond prices would not be good news for bonds held in a pension plan’s investment portfolio, Mr. Clausen said a rise in interest rates will nonetheless help a plan immensely because its liabilities are measured based on long-term interest rates.

“If the managers’ predictions come true this year, what we’ll see is that the liabilities will drop by more than the assets,” Mr. Clausen said in an interview. “In terms of the funded status, it’s a good thing.”

While pension funds saw almost flat returns on their investment portfolios in 2011, their funded status fell by almost 15 percentage points because falling interest rates sent their estimated liabilities soaring.

In its annual ‘Fearless Forecast’ released Monday, Mercer said money managers named the ongoing debt situation in Europe and the potential slowdown of China’s economy as the two top risks for 2012 that could exert a significant drag on the global economy.

While long-term bonds are expected to return just 0.4 per cent this year, the money managers predicted better returns for the broader Canadian and global bond markets, which are expected to post returns of 2 and 3 per cent respectively.

They survey found managers expect the Canadian dollar (CAD/USD-I0.980.0050.49%) will trade at par with the U.S. dollar at the end of 2012, while the price of crude oil (CL-FT101.640.330.33%) will fall slightly to $95 (U.S.) a barrel from $99 at the end of 2011 and the price of gold (GC-FT1,617.109.000.56%) will rise to $1,775 an ounce by the end of 2012 from $1,565 at the end of 2011.

The forecasts are a median of the predictions submitted by money managers, who reported widely varied opinions on many of the categories. For example, forecasts for Canadian stock returns ranged from a 15-per cent increase at the top end of the group to a 0.5-per-cent gain from the bottom 5 per cent of managers surveyed.

Mr. Clausen said the forecast for interest rates and bonds showed a particularly wide range of responses this year. While the median prediction for long-term bond returns in 2012 was 0.4 per cent, the high end of the range was 8.7 per cent and the low end was a loss of 5 per cent.

“There are a lot of different opinions on where bond yields are headed,” Mr. Clausen said. Some fund managers reported interest rates have hit bottom and will rise again, while others said rates will stay at current low levels and some said they will fall even further, he noted.

Gold price predictions for the end of 2012 varied from $2,000 per ounce at the top end of the range to $1,365 an ounce at the bottom. Oil price predictions ranged from $113 a barrel to $80 a barrel.

I am curious to see which institutions predicted bonds will rally and which predicted bonds will lose in 2012. In any case, as I already stated, US job gains will help pensions' funding in 2012, but it won't be enough to make a huge difference to the secular trend.

We are headed for a rude awakening in Canada and elsewhere. Politicians who think all they need to do is raise the retirement age, cut cost of living adjustment and cut benefits are simply deluding themselves. We need to bolster our public defined-benefit plans and offer guaranteed pensions to all. Everything else is just cosmetic and will not reverse our destiny with pension poverty.

Below, watch excerpts from an excellent PBS Frontline documentary, Can You Afford to Retire?, which originally aired back in 2006 (recently re-aired and uploaded in YouTube). As you can see, along with employment, pensions are quickly becoming the biggest political issue of our time. America doesn't only have an unemployment crisis, it has a retirement crisis. "We are now shifting from a lifetime pensions to lifetime work. It's the end of retirement".

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